BP 2014 Annual Report Download - page 114

1. Significant accounting policies, judgements, estimates and assumptions – continued
Significant estimate or judgement: income taxes
The computation of the group’s income tax expense and liability involves the interpretation of applicable tax laws and regulations in many
jurisdictions throughout the world. The resolution of tax positions taken by the group, through negotiations with relevant tax authorities or through
litigation, can take several years to complete and in some cases it is difficult to predict the ultimate outcome. Therefore, judgement is required to
determine provisions for income taxes.
In addition, the group has carry-forward tax losses and tax credits in certain taxing jurisdictions that are available to offset against future taxable
profit. However, deferred tax assets are recognized only to the extent that it is probable that taxable profit will be available against which the unused
tax losses or tax credits can be utilized. Management judgement is exercised in assessing whether this is the case.
To the extent that actual outcomes differ from management’s estimates, income tax charges or credits, and changes in current and deferred tax
assets or liabilities, may arise in future periods. For more information see Note 7.
Judgement is also required when determining whether a particular tax is an income tax or another type of tax (for example a production tax).
Accounting for deferred tax is applied to income taxes as described above, but is not applied to other types of taxes; rather such taxes are
recognized in the income statement on an appropriate basis.
Customs duties and sales taxes
Customs duties and sales taxes which are passed on to customers are excluded from revenues and expenses. Assets and liabilities are recognized net
of the amount of customs duties or sales tax except:
• Where the customs duty or sales taxes incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case
the customs duty or sales tax is recognized as part of the cost of acquisition of the asset.
• Receivables and payables are stated with the amount of customs duty or sales tax included.
The net amount of sales tax recoverable from, or payable to, the taxation authority is included within receivables or payables in the balance sheet.
Own equity instruments
The group’s holdings in its own equity instruments are shown as deductions from shareholders’ equity at cost. For accounting purposes, own equity
instruments include both treasury shares and shares purchased from the open market. Some of these own equity instruments are held by Employee
Share Ownership Plans (ESOPs), including certain shares transferred out of treasury. Consideration, if any, received for the sale of such shares is also
recognized in equity, with any difference between the proceeds from sale and the original cost being taken to the profit and loss account reserve. No
gain or loss is recognized in the income statement on the purchase, sale, issue or cancellation of equity shares. Shares repurchased under the share
buy-back programme which are immediately cancelled are not shown as treasury shares, but are shown as a deduction from the profit and loss
account reserve in the group statement of changes in equity.
Revenue
Revenue arising from the sale of goods is recognized when the significant risks and rewards of ownership have passed to the buyer, which is typically
at the point that title passes, and the revenue can be reliably measured.
Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods provided in the normal
course of business, net of discounts, customs duties and sales taxes.
Physical exchanges are reported net, as are sales and purchases made with a common counterparty, as part of an arrangement similar to a physical
exchange. Similarly, where the group acts as agent on behalf of a third party to procure or market energy commodities, any associated fee income is
recognized but no purchase or sale is recorded. Additionally, where forward sale and purchase contracts for oil, natural gas or power have been
determined to be for trading purposes, the associated sales and purchases are reported net within sales and other operating revenues whether or not
physical delivery has occurred.
Generally, revenues from the production of oil and natural gas properties in which the group has an interest with joint operation partners are recognized
on the basis of the group’s working interest in those properties (the entitlement method). Differences between the production sold and the group’s
share of production are not significant.
Interest income is recognized as the interest accrues (using the effective interest rate that is the rate that exactly discounts estimated future cash
receipts through the expected life of the financial instrument to the net carrying amount of the financial asset).
Dividend income from investments is recognized when the shareholders’ right to receive the payment is established.
Finance costs
Finance costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial
period of time to get ready for their intended use, are added to the cost of those assets until such time as the assets are substantially ready for their
intended use. All other finance costs are recognized in the income statement in the period in which they are incurred.
Impact of new International Financial Reporting Standards
There are no new or amended standards or interpretations adopted during the year that have a significant impact on the financial statements.
Not yet adopted
The following pronouncements from the IASB will become effective for future financial reporting periods and have not yet been adopted by the group.
The IASB issued IFRS 15 ‘Revenue from Contracts with Customers’, which provides a single model for accounting for revenue arising from contracts
with customers and is effective for annual periods beginning on or after 1 January 2017. IFRS 15 will supersede IAS 18 ‘Revenue’.
The IASB has also issued IFRS 9 ‘Financial Instruments’, which will supersede IAS 39 ‘Financial Instruments: Recognition and Measurement’ and is
effective for annual periods beginning on or after 1 January 2018. IFRS 9 covers classification and measurement of financial assets and financial
liabilities, impairment methodology and hedge accounting.
BP has not yet decided the date of adoption for the group for IFRS 15 and IFRS 9 and has not yet completed its evaluation of the effect of adoption.
The EU has not yet adopted IFRS 15 or IFRS 9.
There are no other standards and interpretations in issue but not yet adopted that the directors anticipate will have a material effect on the reported
income or net assets of the group.
110 BP Annual Report and Form 20-F 2014